Are your charitable income tax deductions at risk?

How much attention do you pay to the receipts you get from charities thanking you for your donations? If you are like most people, probably not much. Every year, I have the opportunity to review charitable gift receipts my both I and my clients receive for our gifts. I’m often looking at receipts for particularly large donations, but also see many for smaller donations of cash. Are you surprised that nearly 30% of these receipts are deficient? 

For the last decade (or more), the IRS and U.S. Tax Court have routinely denied charitable deductions claimed on income tax returns. In many of these cases, deductions were denied not because gifts weren’t made (in fact, they were!), but because the donor didn’t properly substantiate the gifts. Here are some particularly scary examples: 

1. A Texas couple, David and Veronda Durden, claimed charitable deductions for $25,000 of cash gifts. They had cancelled checks for all of their donations and receipts from the charities for the gifts, but the receipts didn’t satisfy the requirements of a contemporaneous written acknowledgment required by the Internal Revenue Code. The Durdens went back to the charities to correct the receipts, but the Tax Court ruled that it was too late. 

1. A California couple, Joseph and Shirley Mohamed, claimed an $18.5 million charitable deduction for property given to charity. Their deduction was denied because they didn’t have a qualified appraisaleven though it was undisputed that they had made the donation and independent appraisals later determined that the value of the donated property was far in excess of $18.5 million.

Imagine missing out on available tax savings – as much as $7,000+ for the Durdens or $7 million+ for the Mohameds – for a charitable gift you actually made. If you are like me, this is not a welcome vision!

What should you do to be sure your charitable contribution deductions aren’t denied? 

First, refer to the chart below to identify what records you are required to keep to substantiate your gifts: 

Second, when you receive receipts from charities, read them, and if needed, go back to the charity to request corrections. The most common problem I see is the failure to include a statement that “no goods or services were provided by the charity in exchange for the gift” when this is actually the case. While it is often smaller charities that unintentionally omit this language from their receipts, I regularly see larger charities make this mistake as well. 

Next, before you file your income tax return each year, be sure you have the proper substantiation for each gift already in hand. By the time you are audited, it is too late to go back to the charity for a correction. 

          Tip: If you are someone who makes a lot of gifts and doesn’t want to fiddle with tons of small receipts, consider making your gifts through a donor advised fund. This is what I do and it makes my charitable giving so much simpler. A donor advised fund is an account at a public charity (mine is with Fidelity Charitable). I donate cash or appreciated stock (avoiding capital gain recognition) to the fund and get one easy receipt for the donation that is always correct. Whenever I want to make gifts to other charities, I recommend the grant from my donor advised fund and Fidelity Charitable approves it as long as the recipient is a qualified charity. Fidelity Charitable handles all of the compliance and record keeping.

          Tip: If you donate to your own private family foundation, the substantiation requirements still apply. Be sure to have the foundation issue you a contemporaneous written acknowledgement and comply with any other substantiation requirements above.  

Finally, all of the above assumes you are donating to a charity eligible to receive tax deductible donations. You can always verify an organization’s eligibility prior to a donation here https://apps.irs.gov/app/eos/, and keep in mind that donations to individuals, political organizations, social clubs or homeowner organizations, most foreign organizations, for raffle tickets, or (in most cases) items purchased at charity auctions are not tax deductible. 

Don’t hesitate to call us with any questions or for a review of your charitable donation receipts. If you’d like more information on charitable gift substantiation, the IRS has some helpful pamphlets and publications which are available here: 

Publication 1771 – Charitable Contributions ­– Substantiation and Disclosure Requirements 

Publication 561 – Determining the Value of Donated Property